European Central Bank chief Mario Draghi told euro zone governments on Friday to act fast to get their rescue fund up and running, expressing exasperation at their lack of progress in response to an escalating debt crisis.
The ECB is under intense pressure to play a greater role in tackling the euro zone crisis. A Reuters poll of 50 bond strategists in Europe and the United States gave an even probability that it would eventually agree to print money.
But Draghi put the onus firmly on governments, saying they had failed to put into practice decisions underpinning the European Financial Stability Facility -- the rescue fund which they have promised to give more firepower without yet explaining how.
"Where is the implementation of these long-standing decisions?" Draghi said at a banking conference in Frankfurt. "We should not be waiting any longer."
Many analysts believe the only way to stem the contagion in a crisis that began with Greece but now risks engulfing Italy, Spain and even France is for the ECB to buy up large quantities of bonds, effectively the sort of 'quantitative easing' undertaken by the U.S. and British central banks.
That would be a highly controversial break from its existing policy, where it offsets government bond purchases by draining liquidity from the system in separate operations.
While the ECB, with strong German support, is anxious to remain free from political interference and is resisting calls to take major action in response to the spreading debt crisis, it has made limited bond purchases that have steadied investors' nerves.
European shares trimmed losses, helped by falling Italian and Spanish bond yields after the ECB intervened again to buy debt in the secondary market on Friday.
Deutsche Bank Chief Executive Josef Ackermann said European states could not rely on the ECB to solve the euro zone debt crisis. "The ECB's primary role should not be to take up these bonds," he said.
Euro zone governments have set a December deadline to strengthen the EFSF but these efforts have been undermined by delays, surging borrowing costs and scant investor interest.
Italian Prime Minister Mario Monti unveiled sweeping reforms to dig the country out of crisis and said Italians were confronting a "serious emergency".
Monti, who enjoys 75 percent support in opinion polls, comfortably won a vote of confidence in his new government in the Senate on Thursday, by 281 votes to 25.
He faces another confidence vote in the Chamber of Deputies, the lower house, on Friday, which he also expected to win comfortably.
"Only if we can avoid being seen as the weak link of Europe can we contribute to European reforms," said Monti, who was sworn in on Wednesday as head of a government of experts after a rushed transition from the discredited Silvio Berlusconi.
In Athens, Greece's national unity government was submitting an austerity budget to parliament, a first step toward meeting the terms of an international bailout it needs to avoid bankruptcy.
But already a widening rift between the coalition's main parties was apparent.
Technocrat Prime Minister Lucas Papademos must obtain the endorsement of the rival parties that they will do what it takes to meet the terms of the aid deal and persuade Greece's lenders to release emergency funds it needs to avoid default in mid-December, plus more longer-term financing later.
In Rome, Monti outlined a raft of policies including pension and labor market reform, a crackdown on tax evasion and changes to the tax system in his maiden speech to parliament.
He later spoke to French President Nicolas Sarkozy and German Chancellor Angela Merkel, who all agreed on the need to accelerate reforms, the three leaders said in a joint statement.
With Italy's borrowing costs now at unsustainable levels, Monti will have to work fast to calm financial markets, given that Italy needs to refinance some 200 billion euros ($273 billion) of bonds by the end of April.
But no amount of austerity in Greece, Italy, Spain, Ireland and France is likely to convince the markets without some dramatic action in the shorter term, involving the ECB.
Euro zone officials hope that if Merkel and others find themselves staring into the abyss, the unthinkable will rapidly become thinkable.
Merkel and British Prime Minister David Cameron will try to resolve opposing views on the euro zone crisis on Friday, after Berlin accused London of being selfish about Europe in comments that touched off British sensitivities about German bossiness.
The outlines of a potential deal became clearer ahead of the Berlin meeting as the Financial Times reported that Cameron would be prepared to back Merkel's plans to strengthen economic union in the eurozone, on condition he wins safeguards to protect the City of London from European legislation.
Cameron will restate his opposition to a Franco-German proposal for a so-called Tobin tax on financial transactions, which Britain believes would have a withering effect on its financial district, the FT said in an unsourced report.
It looks like a preliminary solution is in place as the WSJ reports, ECB Lending To IMF Proposal Gaining Traction:
A proposal that the International Monetary Fund could call on the European Central Bank to lend it money so it can finance bailouts for euro-zone governments threatened with insolvency is gaining traction and if all parties agree, a deal could be announced at the Dec. 9 European Union summit, two people with direct knowledge of the matter said.
"Germany and the ECB are still opposed to the idea but with no other viable alternatives talks could start soon. There is urgency in this as something must be in place if Italy needs a bailout," a senior euro-zone government official said.
An IMF official said the only other proposal on the table is the ECB financing the euro-zone's bailout mechanism--the European Financial Stability Facility--but Berlin has made clear that won't happen. "It's the French proposal to turn the EFSF into a bank so it can lend to countries in trouble. But it's going nowhere," this official said.
The idea first came up at the summit of the Group of 20 industrialized and developing nations in Cannes, France earlier this month as an agreement reached in October by European Union leaders to boost the firepower of the EFSF to EUR1 trillion was running into trouble.
In existing euro-zone bailout programs, the IMF has contributed roughly a third of the total sum depending on the time frame, with the rest coming from the EU and the ECB.
Beyond the IMF, future euro-zone bailouts are to be funded by the EFSF with a current capacity of EUR440 billion. But with around EUR250 billion planned to keep Greece, Portugal and Ireland above water, it isn't to have the firepower to afford an Italian bailout if that became necessary.
"Euro-zone governments are unwilling to boost their guarantees to the EFSF and the search for potential investors in Asia to ensure the EUR1 trillion firewall came up with nothing. Add to this that if Italy needs a bailout its contribution the EFSF will be withdrawn and you are in real trouble. There is simply not enough money to bail out another country beyond Greece, Portugal and Ireland," the euro-zone official said.
The ECB has been buying a rising number of bonds from countries such as Italy and Spain to keep the debt markets going as the borrowing costs of those countries are hovering at unsustainable levels. But it has repeatedly said the measure is temporary. Economists have said using the ECB's limitless resources may be the only way to bring Europe's spiraling debt crisis under control.
The ECB and the IMF have declined to comment on the proposal.
The officials didn't say whether the IMF would become the main lender for future bailouts if it gets loans from the ECB or what the role of the EFSF and its successor come 2013--the European Stability Mechanism--will be.
"These can all be worked out fast if we have a deal that the ECB can lend to the IMF," the euro-zone official said.
While EU laws don't allow the ECB to finance euro-zone governments, article 23 of its charter states that it can conduct "banking transactions in relations with third countries and international organizations, including borrowing and lending operations."
"That article is our window of opportunity," the IMF official said.
"Always a day late and a dollar short," is how Forbes describes the European response to the crisis. "By doing little dribbles [and] not having a real strategy what you're doing is killing the banking system." Let's see if the new proposal allows them to act more forcefully, giving the EU some breathing room to start implementing measures for structural reforms.